Let’s chat about Microsoft and Xbox. Amid the recent Xbox reset news was a vision to entertain “more than a billion people each day.” Almost a decade ago, there was a spiritually similar statement of “2 billion gamers”, and I had written a discussion back then.
In that earlier “billion gamers” iteration, Microsoft’s initial bet was on cloud gaming, and later Game Pass. And in my post I had bemoaned for Microsoft, mobile was where there was the biggest gap between reality and aspiration. In this latest iteration, it’s not clear yet how they aim to achieve this audacious vision, while the immediate steps taken are a streamlining of their assets.
In the current landscape, mobile remains central to any talk of “billion gamers”. Microsoft’s standing in mobile has improved – with Mojang and King, they own 2 of the biggest (and long-lasting) franchises on mobile. But mobile is a vastly more mature (if not declining) platform these days, with most of the dynamism (for new games) coming from East Asia. (Cue Matthew Ball, now Chief Strategy Officer at Xbox.)
And distribution remains elusive, even for Microsoft. In China, HTML5 (mini-apps) have become mainstream, thanks to Wechat, Alipay and Douyin as super-apps that enable adoption. Elsewhere, it’s Roblox – I was in Bellevue recently, just a few miles away from Xbox HQ, and at every public library there were kids playing Roblox. These seem to be the only meaningful new platforms for gaming (at billion-gamer scale), in the last decade.
Perhaps it’s worth questioning – is this Xbox vision actually sincere? Or is it just empty corporate rhetoric (as quite a few folks in the industry and media have commented)? I think both can be true. It’s sincere, in the sense that it’s meant to be an aspirational north star, and it’s in-line with the broader Microsoft mission (”to empower every person and every organization on the planet to achieve more”). Microsoft has always been about breadth of reach (”a computer on every desk and in every home”). But it does feel empty, as we can’t see the credible pathway to 5-6x’ing their current audience. It also feels strained, as many of the crown jewels in the Xbox portfolio – Call of Duty, the Blizzard franchises – are about depth (deep fandom), and this vision could alienate core gamers.
In other words: Xbox’s capabilities don’t support their stated vision. Now what?
In the short term, it seems the focus will be on financial and operational health, so I wouldn’t expect much in big bets on audience growth. In 12 months, there will be pressure to articulate that vision further; it would also be telling if “a billion gamers each day” is not spoken of again. Purely in numbers, the audience growth story has to come from China and/or various emerging markets – unless there’s a gold rush of a completely new platform. Apple and Google are ceding some ground in mobile, but it would still be a herculean effort for anyone to establish an independent distribution on top of iOS and Android. (The only place where this happened is China, and it’s only due to Google exiting and Chinese Android OEMs filling the void.) AI is the elephant in the room, but we are still at the stage of the cycle where we are not asking the right questions, never mind knowing the right answers.
(A quick detour. Valve deserves a mention here. Against all odds, they’ve made some material progress with SteamOS, mostly thanks to Steam Deck. I’ve always ridiculed them for leaning into Linux gaming as part of their strategy to achieve independence from Windows, but their magic trick has worked. This is a real example of a company doggedly gaining new capabilities – over more than a decade – in pursuit of their vision. And thus, with Steam Machine, they continue to push their boulder up the hill.)
The other direction – perhaps I’m being a bit flippant – is to change the vision to match the capabilities. This is where one can speculate an Xbox spinoff. In an independent Xbox, the vision no longer needs to maintain those tenuous ties to the broader Microsoft mission. In a way, it has always been strained. Decades ago, Xbox was born in the strategic battle for the living room. As is often the case, platform evolutions shift the basis for competition, and the living room is now mostly a graveyard for indentured hardware servants to our current mobile overlords. And later, when it was evident we were in the post-PC / post-Wintel era of computing, strategy mandated Xbox + Windows software interoperability, at the expense of Xbox hardware exclusivity. Unsurprisingly Xbox the console platform wilted. An independent Xbox can revisit some of these decisions. There is still a sustainable business and profits to be earned in the living room – I can’t both cheer on Valve and tell Xbox to give up in the same breath.
Would Microsoft want to divest Xbox? I don’t know! A quick chat with ChatGPT gave me a $100B enterprise value for an independent Xbox, in the bull case. That’s just not very interesting Microsoft which hovers around $3T in market cap. The conundrum is to make Xbox strategically relevant to Microsoft, and again, why I argue the “billion gamers each day” vision is sincere. If over the next couple of years, we see some material bets on growth coming from Mojang and King, that would be indication of earnest effort towards the billion-gamers vision, and more reason for Xbox to stay. if it’s primarily improvements in financial health and a revitalized PC/console business, it would seem to tip the scales in favor of divesting. Let’s see.